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Commercial Law PART B

- Include rights of possession and use
- Interest: represents quantum of rights over the asset which he enjoys against all
- Title represents the strength of the interest he enjoys over all others

Possessory Title
- Legal: right of person to possess, the proprietary title of the owner is paramount
- Physical: having control of the chattel
- Must have actual and intention to control. Usually deemed to continue unless
passed or abandoned (intentional relinquishment of title inferred from conduct)
- Non owners in lawful possession of goods are entitled to sue in conversion, as long
as they have sufficient property or interest in the goods subject to the claim deriving
from their possession or right to possess. (Wilbraham v Snow)
- Sutton V Buck: even if it was in a invalid Sale and Purchase Agreement, once
possession is taken but the buyer with consent of the owner who had intention to
transfer, it is said that the buyer had derived right to possession from the true owner
and that was enough to defeat any right claimed (e.g. from bailiff).

a) Finders Possessory interest
- Armory v Delamirie- innocent finders have a right of possession against all but the
rightful owner, and may claim possessory title to the found goods derived from the
mere fact of possession and not obtained by dishonest means.
- Parker v British Airways- innocent finders only acquire right over the chattel if it was
abandoned and he takes into his care and control
- Finders must: 1) take reasonable measures to find the true owner (Parker) and 2)
must have permission from the occupier to be on the land in which the chattel is
found on (Waverly v Fletcher).
- In the case Flack v National Crime Authority a substantial sum of money was found in
Mrs Flacks house which was confiscated and held by the police. Mrs Flack was
allowed to keep the money as the court ruled she manifested an intention to
exercise control over any chattels in her house, whether or not she was aware of
them as her house was not public and entrance was fairly restricted.

b) Occupiers rights
- Have superior right over the found chattel attached to the building over the finder
(Parker) and those chattels unattached to the land only if he has the intention to
exercise control over the land as their interest in the goods is thought to have
existed before the finders interest (Waverley)
- An occupier who allows anyone to be on the property at all times has no element of
control over the property and thus will have acquire proprietary interest in the
goods.(Tamworth v AG (NZ case))
- Parker quoting Elwes v Brigg Gas Company- No doubt those chattels become affixed
to the realty, ownership of the chattel will follow ownership of the realty. Therefore
ownership of chattels embedded in the land so as to form part of the land, owner of

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land has superior right over the finder not withstanding that the owner is unaware of
the existence.
c) Theft
- If possession is taken, a wrongdoer may acquire a possessory title to the goods
which he has unlawfully taken into his possession but of course the owners title will
always prevail.
- In order to avoid a free for all, absent of owner renders wrong downers possessory
title the better one: Bird v Fort Frances(Ontario case)
- Tinsley v Milligan: even if initial acquisition of property was illegal, no illegal
agreement was being enforced and the applicants were not required to rely on their
own illegality to establish their case.
- Costello:
- 1) establish fact of possession gives possessory title which defeats illegal methods of
- 2) Where titles are relative party with stronger title succeeds, suspect of thefts of
car, police ultra vires their authority in detaining the car has a weaker title.
- Possessory title of thieves could be defeated by a bona fide purchaser if the goods
were subsequently detained by the police and lawfully (not ultra vires) sold to a third
party, the bona fide purchaser had prima facie acquired the goods . Buckley v Gross

Title to Sue in Conversion: Parker v BA:

- 1) Occupier of land has rights superior to those of a finder in or attached to the land
and an occupier of a building have that similar right regardless of whether or not
aware of the propertys presence.
- 2) As long as he has manifested an intention to exercise control over the building and
the things which may be upon it.

BAILMENT- where bailee is in possession of goods which belong to another.
- Elements
Possession of tangible goods
Must have come into or take possession of the goods without
intention to assert control or physical control means no bailment
(Ashby v Tolhurst)
Such as car owners and management of car parks by an in and out
permit system(Always Win Ltd) otherwise if a ticket and you park
yourself is issued it is a mere licence (Ho Sui Kam v On Park Parking)

Bailee must have consent to the possession
Anyone voluntarily assumes possession of goods belong to another
will be held to owe at least the principal duties of the bailee- Palmer
Bailee needs to voluntarily take possession of the bailors chattel,
regardless of whether the bailor consented to or not (The Pioneer

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Bailee can then invoke terms of a sub bailment under which he

received the goods if owner has consented to it.
Sub-bailee can only be said to have voluntarily taken into possession if
he has sufficient notice that a person other than the bailee is
interested in the goods. And will assume towards that other person
the responsibility for the goods

Bailor must have superior interest in the goods

Bailee interest is limited possessory interest.
Will be required to return the goods to the bailor or deal consistent to
the bailors instructions. If no intention of the goods to be returned,
no bailment (Foley v Hill)
Mercer v Craven Grail Storage: bailee is authorised to substitute other
goods for those which have been substituted. If expressly made or
implied as long as parties intended that the depositor should have
proprietary rights.
Even if contemplated changes are made to the chattel
Goods sold subject to reservation of title clause, buyer is a bailee even
thought they are given power to sell goods to sub buyer or use them
(Clough Mill)

Bailees Duty
Exercise reasonable care for safety of the article entrusted to him as
demanded by the circumstances of the case. Take responsibility for damage
done or theft and take reasonable steps to secure recovery of goods in the
circumstances(Houghland v RR Low)
Burden of proof lies on the bailee to show that it had exercised due care or
that even if due care was taken damage/ loss would have taken place (Always
Win Limited)
If bailee entrusts his agent or servant (must do so with permission), he is still
answerable for the manner in which the servant or agent arise it out. Unless
that act of his servant is outside the scope of their employment, the bailee
will then not be liable for damages (Always Win)
Standard of care for bailee for reward and an involuntary bailee is the same
(China national silk case)

Bailee and Third Parties

Bailee may sue third parties in trespass, conversion, detinue and negligence
since against the wrongdoer, having possession renders title (the Winkfield)
Whereas bailor cannot sue unless he has the right to immediate possession
(bailment at will) of the chattel at the time of the wrong doing. OR
Bailee commits a wrongful act that repudiated the bailment (North General)
Once the bailee has recovered full damages from wrong doer, the
wrongdoer has a full answer to any action by the bailor. (the Winkfield)
Bailor may recover full market value of the goods and damages from
wrongdoer unless they are too remote. But must account surplus to the

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Wrongdoer defends action on behalf of and with authority of true
Wrongdoer committed with authority of true owner
Wrongdoer has become owner of the goods.

FOUR KINDS OF CONSENSUAL SECURITY (Lien, Pledge, Mortgage, Bills of Exchange)
- Security refers to the provision of rights against a persons assets which are intended
to enhance the probably of recovering a debt claim against them

1) Lien-retains possession
- S41 Sales of Goods Ordinance: seller has lien on unpaid goods for the price while he
is in possession of them.
- COMMON LAW: A right to retain possession of goods under which the debt arises in
lieu of payment confers no title to the lien holder: HK Exhaust Emission Laboratory v
CRIC Motor Work.
- may be general or particular
- Common Law lien a.k.a. Particular Lien (HK EXHAUST EMISSION)
Lien over a specific good related to the debt)
Allows creditor to retain possession of goods as security for payment of debts
which relate to the property retained
Creditor show his labour that is expended on the chattel when it came into
his lawful possession
Labour improved the condition of the chattel
- Statutory Lien a.k.a. General Lien(HK EXHAUST EMISSION)
Of all properties of the debtor currently in possession of the creditor
Allows creditor to retain possession of any property of the debtor until any
debt due from the debtor is paid-stockbrokers
As long as they have possession of other goods belonging to the debtor, the
lien still exists
Existence is that the usage in a particular trade in a particular locality must be
certain and reasonable that everyone in the trade knew of it or on inquiry
could have ascertained its existence
- Debt must be of a definite amount Singh v Thaper
- LIENEE under Bankruptcy Ordinance is a secured creditor
- Loss of right when
I) possession is lost unless loss of possession is induced by fraud or otherwise
wrongfully obtained, the lien is recovered. (Yuen)
II) Even if lienee later recovers possession, the lien is terminated. (Pennington
v Reliance Motor Works)
III) Lien is mere right of possession, using goods in a manner other than mere
possession renders the lien extinct. (Jumbo Key Holdings v Hong Kong
Equestrian Centre)

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EQUITABLE: Cheung Kwan Kei v Cheung Kwan Fai: vendor has equitable lien over
property when SAP is executed and upon completion the consideration is not
Non possessory, arising due to specific performance.
Yuen v Kings Way car Services:
First identify what kind of lien it is, has the lien been loss by extinction.
Dispossession renders the lien extinct, but subsequent regaining possession of the
property by the creditor does not necessarily render the lien extinct. It is determined
by the matter of fraud.

2) Pledge-delivers possession
- A form of bailment for security. Title remains with the pledgor whilst the possession
is held by the creditor.
- Pledgor in possession is treated as a mercantile agent and is capable of passing good
title to a bona fide purchaser for value without notice of the continuing pledge.
- Can only be created if asset is capable of either constructive or actual delivery of it to
the creditor (Official Assignee of Madras v Mercantile Bank of India)
- Delivery may be actual (physically handing the actual goods over), symbolic (handing
keys to building over) or constructive by telling the pledge where they are (Dublin
City Distillery v Doherty).
- Once possession is returned to the pledgor the pledge is no longer effective
- Goods held by a third party may be deemed constructively held for the pledge; the
third party must have notification from the pledgor of the transfer of possession.
- Non negotiable transport documents- Pledge of documents referring to goods other
than a bill of lading, a document intangibles that embodies title to goods, is not in
general to be deemed a pledge of goods and is merely a pledge over the documents
(William Mc Ewan v Smith)
- Non negotiable instruments- bill of exchange marked with not negotiable is
incapable of transfer therefore cannot be pledged. Cheques crossed not negotiable
remains transferable and only effect of the crossing is that a transferee acquires no
better title than his transferor and thus takes subject to equities.
- A cheque crossed account payee or crossed as not transferable, is not capable of
being pledged.
- Share and debenture certificates are not recognised under English law to be pledged
as the delivery of share certificate and a completed transfer of shares agreement
only renders them an equitable charge and not a pledge. At best it confers rights to
registration and not rights stemming from the registration.

Giving Rights over assets

3) Mortgage
- Statutory definition in CPO- any charge or lien on any property for securing money or
moneys worth
- Goode: a mortgage is a right of appropriation (such as a charge) plus a transfer of
- Transfer of ownership (legal or equitable title) of an asset to the mortgagee.

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Mortgagee becomes the legal owner who has a right to sell on default and an
obligation to transfer title back to the mortgagor on satisfaction of the debt
Allows banks ability to realise the security if necessary and prevents borrower from
selling the secured assets.
No need to take possession for the mortgagee to be perfected only when in default,
as commercially it is not practical to do so.
But Mortgagor obtains a right in equity as beneficial owner from a equity of
redemption granted to them (Duchess of Hamilton v Countess of Dirlton),
Mortgagor either retain possession by licence or formal lease (Typhoon 8 Research v
Seapower Resources)
May be registered under the s80 Companies Ordinance
Equitable mortgage does not transfer legal title exists as a less formal form of
security that can be ignored by a bona fide purchaser for value of the legal title to an
asset without notice, plus there is no power of sale.

4) Bills of Sale Fixed and Floating Charge

a) Fixed Charge
- Confers rights not possession, should be perfected by also taking a pledge over the
- Debt is secured against a fixed asset
- Depending on the agreement, the charger will require the chargees permission
before dealing with the asset fixed against the debt.
- When an enforcement event occurs as specified in the charge document, the bank or
charger may require the charge to sell the asset or appoint a receiver to do so
- S80 Companies Ordinance, charges may be registered
b) Floating Charge
- Debt secured against an equitable entity, over a group of assets present or futures
like shares or stock which may fluctuate in price and are identified generically
- Chargor is free to deal with the assets under ordinary course of business until an
event of default under the agreement that triggers crystallisation.
- EQUITY Floating charge operates in equity over existing and future property initially
as a matter of contract and then conveyance by way of with a constructive trust
which fixes upon the property in the hands of the chargor (Re Lind)
- Crystallisation- freezes the chargors freedom to deal with the assets over which it
floats, effectively becoming a fixed charge with respect to any of the assets over
which it previously floated (Re Permanent Houses)
Occurs when the mechanism under the loan agreement is triggered and will
restrict the borrowers freedom to deal with the assets over which it floats
can be frozen
Such as on events of borrowers liquidation, administrative
receivership, borrower ceases to carry on business, intervention by
the bank
Re Manurewa Transport, crystallisation does not itself renders a new charge
to be registered, but it is good commercial sense to do so as it gives notice to

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prospective creditors notice that the borrower has lost its authority to deal
with the secured assets.
Floating charges are vulnerable to later fixed charges as it ranks behind them in
May appoint a receiver to enforce the charge but receiver will act as agent of the

Charge over Bank Account
- S15A Law Amendment and Reform (Consolidated) Ordinance
A person can charge his chose in action (non-tangible goods) for the benefit
of another to secure a debt.
Reconciled with Re Charge Card Service
Millett J indicated that a charge in favour of a debtor of his own
indebtedness to the chargor is conceptually impossible, therefore
cannot charge against bank account.
Since it would be impossible for a bank to realise its security in the
normal way because it could not claim payment of the debt from itself.
A charge or mortgage is a valid security over a choses in action such as a bank
However there is a question of whether it is necessary to register as it is not
clear whether or not such account represents a book debt or not.
But as Hoffman in BCCI stated, that these charges are commn and the fact
that equivalent security could be created in other ways was no reason for
preventing banks and their customers to charge over deposits.
However Independent Automatic Sales would give a usual outlook that fund
at bank would not be regarded as a book debt.

Charge over future assets
- Equitable doctrine: treats as done that which ought to be done, hence there is some
sort of trust in favour of the lender would be created as soon as the charge comes
into existence.
- Equity can enforce a promise given for value to transfer property yet to come into
existence as soon as it came into existence
- EQUITY Floating charge operates in equity over existing and future property initially
as a matter of contract and then conveyance by way of with a constructive trust
which fixes upon the property in the hands of the chargor (Re Lind)

Registration-s83 (2) certificate of registration is evidence that charge is registered
- S80 Companies Ordinance states that registration of fixed and floating charges is
- S80 (1) CO, sent to the Companies Registry. But it is a registration of particulars of
the charge and not that of the documents creating the charge. But if unregistered, it
is void against other secured creditors.
- S80(2) must register charges over book debts and floating charges over all

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Registration only gives constructive notice of existence of the charge and not the
contents of the charge.
S86C) - if registration within 5 weeks of creation of the charge, date of registration is
the date of the creation of the charge.
Court may grant extension for registration.


- ABN Amro Bank v Chiyu Banking Corporation: In normal circumstances registration
will render the priority of the charges, and fixed charges regardless of time of
registration is superior to any earlier floating charges, unless an existence of a
negative pledge of the company not to create any further charges that rank above or
pari passu to the existing floating charge, and the 2nd fixed chargee has notice of the
negative pledge then 1st floating charge will have priority. Or if 1st floating charge has
crystallised before the creation of the 2nd fixed charge.
- Dearle Hall- Registration of security with the Companies Registry will usually defeat
the rule. In order to priorities between assignments over choses in action, notice of
assignment must be given to the third party which owes the obligation, such notice
will render the first assignment superior to any subsequent assignments. Without
notice the 2nd assignment will take priority if they gave notice to the debtor. The rule
will not apply if a subsequent assignee knows of an earlier assignment when taking
the assignment.
- Constructive notice- it could reasonably be expected that a creditor would search
the charges register.
- Insolvency s265 (3B) CO: if there are insufficient funds to pay of the debts, the fixed
charges have priority over the claims of holders of debentures under any charge
created as a floating charge by the company.
- S266B CO- any dealings of property 6 months prior to winding up will be unfair
preference and voidable, if the buyer is an associate to the company the preference
period is 2 years.
- S267 CO- Floating charge created within 12 months of winding up proceedings will
be invalid unless company was solvent immediately after the creation of the charge.
However the charge will be valid to the extent of the cash paid to the company at
the time of the creation in consideration of it and interest or at 12% per annum,
whichever is lower.(Mace Building v Lunn)
- S268 CO- fraudulent disposition made with a view to defraud creditors will be
voidable at the instance of any person prejudiced by it.

Romalpa Clause
(Not a security interest because it depends upon no title at all passing prior to the price of
the goods being paid)
- Retention of title clause within a contract of sale.
- Reserve title to the seller until all monies owed to the seller by the buyer have been
- Arniyr v Thyssen: all monies Romalpa clause is where seller retains the title until the
buyer has paid the price of the good sand all other sums owing to the seller, does
not usually create a charge

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Statutory retention s21 SOGO, allows title to remain vested with the seller.
Permits the seller to enter onto the buyers premises to reclaim the goods.
Should be a provision seeking to trace the proceeds of onward sale of the goods
through the buyers bank account.
- Exception: where goods have been sold on to an innocent third party then the third
party gets good title.
- Should be an requirement to keep the sellers goods identifiable. S
- Such as separate storage, only if it is detachable then the goods are capable under
the clause- Henry Lennox v Graham Outtick. Otherwise the sellers title in the goods
extinguishes as they cannot trace the goods into the new product.
- Generally not registerable as they are preventing the property in the goods from
passing to the buyer in the first place- Clough Mill v Martin.
Bill of Exchange-
- DEFINE - S3(1) Bill of Exchange Ordinance (e.g s73 Cheque)
Unconditional order in writing
addressed by one person to another
signed by the person giving it
requiring the person to whom it is addressed to 1) pay on demand or at a
2)fixed or determinable future time
as sum certain in money.
To or to the order of a specific person or to bearer
- May be assigned, evidence of the obligation to pay, receiver does not have to give
consideration, s30(1)BEO presumption of signature party appears on the bill is prima
facie deemed to have become a party thereto, the negotiability of the paper enables
anyone holding it to sue the person who created the paper

- Trade bills of exchange: a instrument recognising a trade debt that rather than
demanding immediate payment of goods, this document timelines the buyer of the
goods to promise to pay for the goods after a specific period.
- May be sold at a discount in the capital markets
- Some will have payment of the amount due under them guaranteed by a bank
- Parties: party who takes in good faith for value is a holder in due course and is
unconcerned with any prior equities which affect the bill. That he took the bill in
good faith and for value (s30(2) BEO , London Joint Stock Bank v Simmons)
- S29 BEO a holder who derives his holding from a holder in due course who himself is
not a party to any fraud or illegality has all the rights of that holder in due course as
regards the acceptor and all the parties to the bill prior to that holder.
- The drawer of the bill requires the acceptor to accept the bill in favour of the payee.
The acceptor is only liable once he or she signs the bill.
- No liability arises from a forged signature.
- A bill may be payable to the bearer.
- Zanda Investment v Bank of America: unauthorised signature
Where it appears that the signatory had no actual or apparent authority to
indorse cheques for the party, by s24 BEO, the endorsement does not entitle
banks to retain the proceeds.
S86 BEO- there being no suggestion of bad faith, each back is required to
show that it had not been negligent.

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If a cheque is crossed not negotiable a/c payee only, a bank collecting for an
indorse owes a duty of care to the true owner to take reasonable steps to
satisfy themselves that the payee has authorised the bank to collect for the
Banks have a duty of practical commercial approach that allows them to
presume his customer is in all probability honest unless and until there are
indications to the contrary (Marfani v Midland Bank)
A cheque may be made payable to the bearer
A cheque may be crossed and if so must be collected by a bank
Not negotiable mark renders the cheque transferable but any party taking it
is put on notice that it is no longer a negotiable instrument
A Cheque may be crossed Ac Payee only in which case the bank must collect
it only for the benefit of the named account and no other.

Assignments- simple transfer of rights of the lender without the borrowers consent
- LEGAL: S9 Law Amendment and Reform Consolidation Ordinance - Assignment of
Receivables or debt may be done so by an instrument
in writing and signed by the assignor
Notified in writing to any person against whom the assignor could enforce
the assigned right (on receiving notice of assignment, the borrower is obliged
to pay any monies due under the assigned loan to the new assignee.
if not the assignment will be an equitable one
- Assignment can only transfer rights and not obligations
- However rights under a contract can be assigned without consent only in cases
where it can make no difference to the person whom the obligation lies to which the
two persons he is to discharge it (Tolhurst v Associated Portland Cement
- Equitable Assignment- assignments given effect by the courts of equity and will thus
only pass an equitable right to the chose in action, only intention to assign were
plain an equitable assignment is valid, regardless of notice to the debtor.(Bluebottle
UK v Deputy Commissioner of Taxation)
Intention to assign(Brandt Sons v Dunlop Rubber)
Assignee must consent to the assignment(Standing v Bowring)
No consideration is required (Holt v Heatherfield Trust)
- Assignee must join the assignor in any action on the debt (Three Rivers DC v Bank of
- Useful for banks who wants to assign part of an outstanding loan without disclosure
- Obvious disadvantage is that borrower does not have notice of the assignment and is
entitled to continue making payments through the existing lender, which will render
a good discharge of the debt and assignor is subject to equities (Commercial Factors
v Maxwell Printing).
- Clear way to get around this is for the assignee to take conditions and warranties as
well and representations and undertakings from the assignor that the money will be
paid to them.

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Also rely on s9LARCO to send notice to the debtor upon certain events.
Assignment of part of a debt (RE steel Wing)cannot be legally assigned as it is clearly
not absolute and it would be ineffective under any statutory method for transferring
part of a debt.
Fixed Charge over book debts (National Westminster Bank v Spectrum Plus Limited):
theoretically possible but creditor has to ensure that the charge is properly fixed and
not floating, if the charger has to use the funds on a daily basis as working capital,
the less likely the charge can be regarded as fixed.
Security over a bank account (S15A LARCO, Re Charge Card Services): it is possible
under the statute to do so but it may not be capable of being registered, (RE
Brightlife) since it is unclear whether the money in the account represents a book

SET OFF- a right to set a debt owed by a creditor to a debtor against the debtors debt and
so reduce or extinguish that debt
- Not strict security interest and not registerable
- Equitable right of Set Off
A bank may set off a liquidated debt owed to it by a borrower against a
liquidated debt owed by it to that borrower
If the available if it would support the grant of an injunction in equity to
restrain the plaintiff from proceeding at law(Murphy v Zamonex)
Geldof Metaalconstructie v Simon Carves- there must be
Clear cross claims for debts or damages, which
Were so closely related as to the subject matter that the claim sought
to be set off impeached the other in the sense that it made it
positively unjust that there should be recovery without deduction.

- Contractual set off
Most security documents supporting a loan will enhance the equitable right
of set off by allowing the bank to set of unliquidated (contingent) claims.
Where cross demands between agreeing parties are mutually extinguished

- Set off on liquidation
On commencement of winding up, mutual dealings exist which involve rights
and obligations, where absolute or contingent, s35 Bankruptcy Ordinance.